The Most Common Payroll Errors

Effective payroll management requires making sure your employees receive correct payments, on time, and in compliance with applicable laws. However, without the right tools and resources, employee payroll can be a minefield for errors that can cost employees—and your company—time and money. Follow these tips to identify and avoid the most common payroll errors...

Misclassifying employees 

Misclassifying employees can result in incorrect pay, ultimately leading to overpayment or underpayment of wages. One of the most common misclassification errors is making an incorrect determination about whether an employee should be exempt from overtime. Per the Fair Labor Standards Act (FLSA), all employees must receive overtime pay for any hours worked over 40 hours per week, unless they are classified as exempt. Classifying a non-exempt employee as exempt not only opens your organization to FLSA-related fines, but can also cause an employee to miss out on overtime earnings.

Another common payroll error happens when an individual is classified as an independent contractor rather than an employee. A misclassification error often results in having to research historical payroll records and make retroactive payments or other adjustments to employee pay. In 2019 alone, the US Wage and Hour Division of the Department of Labor recovered a record $322 million in back pay for misclassified employees. Misclassification not only creates trust issues with your employees, but it is also likely to cost your organization money.

Miscalculating pay

An incorrect paycheck can be frustrating for any employee, particularly if the error results in missed payments. Miscalculations also waste time, as you’ll need to dedicate hours or even days to investigate and correct errors outside of the regular payroll cycle. 

According to an American Productivity & Quality Center (APQC) study, organizations take between two and ten days to resolve a payroll error. In the time it takes to fix those errors, employees can grow frustrated or even have trouble paying their bills. While you want to avoid any payroll error, the least you can do is write an employee payroll error letter to let them know what happened and what you're doing to resolve the issue.

Pay miscalculations can happen with salaried or hourly employees. Common miscalculation scenarios include the following:

• Overpaying or underpaying employees
• Making erroneous retroactive payments
• Missing the first paycheck for new hires
• Deducting the wrong amount for benefits or other payroll deductions
• Improperly paying employees who are on disability or other leaves

Not tracking employee hours and overtime

Incorrectly logged overtime hours can lead to improper overtime payments, which leads to corrections possibly spanning across multiple tax years. Correcting those errors takes time and can be incredibly unsettling for employees, whether they are underpaid or overpaid and have to return money to the company. Paying overtime is not just a matter of paying employees the standard 1.5 times their normal pay rate when they work over 40 hours in a week. Overtime payment errors can arise if you miss a payment in any of the following scenarios:

• When employees work during break times
• When employees spend time traveling between work sites
• When employees are required to participate in activities outside of normal hours, for example, in training, teambuilding, or company parties

 

Not reporting all forms of taxable employee compensation

Employee pay comprises more than salary, overtime, commissions, or bonuses. In addition to reporting the more traditional forms of employee pay, you also need to report other forms of taxable compensation to the IRS, such as:

• Stock options and other equity awards
• Employee rewards such as gift cards or travel awards
• Personal use of a company car

A small gift or award to an employee may not seem like compensation, but the IRS may view it as part of your payroll. Not reporting these other forms of compensation can result in tax filing penalties for your organization and the affected employees. 

Incomplete or disorganized records

An unorganized and inefficient payroll process can be a recipe for disaster. Relying on paper processes, manual data entry, or a mass of Excel spreadsheets leads to errors that may take weeks or months to uncover. Disorganized records can also lead you to miss an employee payment or follow-up on items needing urgent attention. Also, having a manual system for managing payroll increases your reliance on one person to manage all payroll actions. Without an organized and automated payroll system, it’s harder for someone to fill in when the payroll manager is out of the office or leaves the company. It can also set you up for problems in the event of an audit or process review. Source